Why MENA-Based Startups Are Choosing to Join the Cayman Islands and the British Virgin Islands – Shareholders – Worldwide
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According to a report by data platform Magnit, the total funding secured by startups in the Middle East and North Africa (MENA) in the first quarter of 2022 was approximately US$864 million. Startups in the UAE accounted for 27.3% of all deals closed. 34.4% of all funding raised across MENA and across the region so far in 2022. US $256 million raised by KSA-based startups in the first quarter of 2022, the Kingdom has raised the highest ever in a quarter. With startup funding in MENA at an all-time high, a growing number of founders will need to consider which jurisdiction to use when incorporating an investor-friendly holding company.
This article provides information on some of the key features of the Cayman Islands and the British Virgin Islands (BVI), which are the offshore jurisdictions most commonly used by MENA-based startups.
Investor Acquaintance
Familiarity with the domicile and legal form of the investment vehicle is an important element in ensuring a startup’s marketability with potential investors. With more than two-thirds of non-U.S. domicile investment funds estimated to reside, the Cayman Islands are by some margin the largest and most popular offshore domicile for setting up investment vehicles. The composition of the investment vehicle is investor driven and in many cases, institutional investors will insist on the Cayman Islands or BVI vehicle being used with their familiarity with the same.
In addition to investor familiarity, both jurisdictions are also recognized as centers of excellence for cross-border financing structures, M&A and capital market transactions and provide a neutral platform to pool and access capital, which is required by regulators. and recognized by banks.
reliable legal system
As the British Overseas Territories, the Cayman Islands and the BVI have English-based legal systems, established and independent judiciary, and a final court of appeal in the form of the UK Privy Council in London, which provides both the comfort of the legal system to investors. Is. with which they are generally familiar and the legal protection of an established body of law. Understood and accepted by both creditors and investors, it is the strong legal and judicial systems (and the associated ease of operation, flexible corporate regime and tax neutrality) that make these two offshore jurisdictions an attractive offering to international investors.
Flexibility and certainty of structures
One of the main reasons why the Cayman Islands and BVI are ideal jurisdictions for startup companies is the flexibility to determine the business characteristics of the organizational structure. The company’s memorandum and articles of association can be easily amended to set out commercially agreed governance provisions. Several classes of shares can be created with separate voting, dividend, and distribution rights, and companies have the option of creating additional classes of shares for subsequent funding rounds.
There is no minimum capital requirement that needs to be invested at the time of incorporation. The company can be incorporated with a single shareholder and director, who can be a single individual or a corporate entity. In addition, there is no requirement for a director or shareholder of a holding company to reside in the Cayman Islands or BVI. The company can conduct (and operate) its business anywhere in the world with minimal financial reporting requirements.
The ultimate goal of most startups is to be successful and provide their investors with a return on their investment. Having a vehicle that is suitable for an IPO or has been acquired by a large company would be an important consideration from the point of view of corporate structure. The Cayman Islands and BVI companies are listed on all major international stock exchanges, including the New York, Hong Kong and London Stock Exchanges.
The flexibility and certainty of the structures associated with the Cayman Islands and BVI companies provide early-stage startups with a platform to negotiate terms with investors and raise capital efficiently.
tax neutrality
International investors will often be from a different jurisdiction than the operating target business and typically want neutrality in choosing the jurisdiction for their investments (including equal legal and tax treatment). There is no income tax or corporation tax attached to companies established in the Cayman Islands or BVI. For investors, this means pooling resources to invest without return on investment, which is subject to an additional layer of taxation imposed by the investor’s home jurisdiction and the jurisdictions where trading profits are made. . These favorable tax regimes provide a tax efficient platform for startups to retain or reinvest profits in the business.
privacy
Neither the Register of Directors nor the Register of Shareholders are required to be publicly filed in the Cayman Islands or BVI to ensure a high level of confidentiality for founders and investors. Founders will be required to provide standard address-your-customer documents for directors and certain investors in the holding company. The Company’s corporate service provider is required to collect beneficial ownership information on investors, and such information may be made available upon request by certain domestic and international government authorities.
Speed and ease of incorporation
The Cayman Islands and BVI are competitively priced and a company can be incorporated very quickly (often within 24 hours of receipt of instructions). The simplicity of setting up companies in one of these jurisdictions plays a part in influencing the decision of the founders to use these jurisdictions.
conclusion
The competitive strength of the Cayman Islands and BVI in the startup space lies in their respective ability to provide effective, cost-effective and tax-neutral platforms for international capital flows in an environment of legal, political and economic stability. Both jurisdictions are renowned for their investor-friendly regulations while maintaining proportionate regulation and supervision, which are all major reasons why MENA-based startups continue to engage in the Cayman Islands and BVI.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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